Sir Paul Callaghan on sustainable economic growth

Paul argues that New Zealanders have earned their prosperity by exploiting their environment. Not only does this bust the myth that we are clean and green, Paul points out that we are poorer for it: in fact, this strategy has seen our GDP plummet to the bottom of the OECD ranking. This approach to paying our way in the world is neither economically nor environmentally sustainable.

Particularly telling is the slide at 8 minutes, which shows how we earn our living in New Zealand. Ever wondered why our productivity is so low? Paul suggests that it is because we choose work in low productivity industries, such as tourism and the wine industry.

At 13 minutes, regular readers of this blog will be wondering whether the TIN100 revenue distribution is described by a power law:

Yes, it seems so, at least in the tail (the plot shows the cumulative distribution of the TIN100 revenue in 2007, x, in millions of dollars). The exponent is close to 2, similar to what we found for the distribution of patents amongst applicants. I will be posting on this in a few weeks.

If you are in Wellington on Thursday, 19 May, Paul will be giving a version of this talk at 6pm at Soundings Theatre at Te Papa Museum. Tickets, available from the Royal Society, are free.

An interesting talk, It’s a pity he didn’t talk more about the last slide, as it contains some great ideas.
Though his rephrasing of the Jane Austen quote came across as a bit sexist.
I think if Prof Callaghan had been made science advisor John Key might have found him a bit too hot to handle 🙂 It’s good to see an eminent scientist speaking out about funding and NZ’s “knowledge” economy.

I don’t want to appear pedantic but Paul’s analysis has a few holes in it.
1. Australia has shot ahead of NZ in GDP/head terms by doing the very thing which Paul dislikes: exploiting resources.
2. The TIN100 list is a bit suspect. There are big firms on it which do not fit the hi-tech mould. Eg F&P Appliances R&D intensity is only 1.1%. Datacom’s would be low too.
3. F&P Healthcare do not ‘dominate their market’. Their Australian competitor ResMed is twice as big.
4. France is the world’s biggest tourist destination,

and so on.
But the main issue is that we couldn’t possibly assemble the human capital required for $45Bn of high tech output by simply touting NZ as a great place to live. The numbers won’t hold water.
It is looking more likely that our prosperity lies in adding some more value to existing commodities whose price looks set to rise for many years. The research challenge is to do that without damaging the environment. This looks plausible to me.

I’m using a computer (with components made from resources that have been exploited from somewhere) to post my message to this thread. Without that someone exploiting/mining the resources from somewhere in order to make things we enjoy today (including my computer), then it would have been impossible for us to get involve in an online discussion like this (ie, without a computer to use).

“Australia has shot ahead of NZ in GDP/head terms by doing the very thing which Paul dislikes: exploiting resources.”

As Falafulu Fisi points out everything we use is a resource. What is becoming more and more obvious is that we need to work on using sustainable/recyclable resources.

Australia has far more mineral resources than NZ does and many of them are mined in areas distant from the cities and arguably in areas that Australians aren’t too worried about.
Resources in NZ seem for some reason to be buried under national parks.

By investing in technologies that provide “added value” we should be able to increase NZ’s GDP without relying on excessive resource use.
And perhaps we would have the human capital to increase GDP if we could keep or repatriate our most talented graduates. Maintaining a clean green environment and providing additional funding to research might help encourage this. Additional funding in the right places would also encourage entrepreneurship in our tech industries.

Some still have the first comment by a user moderated as the odd spam still gets past CAPTCHA. I’d rather not moderate at all for example (it’s more work to do) but I get just enough spam if I don’t moderation user’s first comment that I feel obliged to.

Michael
I think my main objection to Paul’s presentation is that it is simplistic. His route to greater prosperity is very far-fetched, but because of Paul’s eminence it is getting a lot of air-time There are other ways we could go forward which seem more plausible given the size of New Zealand, the culture of its people, and global trends.
Furthermore, some of the data he uses needs more examination. I have already mentioned the France/tourism thing. Clearly you can have a big tourism sector within a high productivity economy.
The relationship between productivity and prosperity (GDP/head) needs more explanation. This is important in resource-rich countries like New Zealand (and Australia and Norway).
It is possible to get mislead by the data about firms. Sales/employee only means something if you know where the value is being added. A firm can have a large turnover but few employees if it sources its products externally.
The firms in the TIN100 list have widely different origins and histories. Not many of them sprang from the ‘smart scientist with a good idea’ model.
Once a firm starts to mature it faces the same resource pressures as firms everywhere. The word is that our high-tech iconic firms are struggling to find good R&D staff now. To achieve Paul’s extra $45Bn of turnover the number of R&D staff employed by firms in NZ would have to increase about fivefold. I can’t imagine a mix of education and immigration policies which would achieve that in any meaningful timeframe.
Hence we have to grow the economy using the resources we have. High-tech startups will have a part to play, but it will not be major.

“I think my main objection to Paulâ€™s presentation is that it is simplistic.”
I see your point but presentations often have ti simplify things if they are to be understood.

“There are other ways we could go forward which seem more plausible given the size of New Zealand, the culture of its people, and global trends.”
Could you expand on some of these other ways? Trying to work out how to improve NZ’s GDP is very complex – some things that have worked in other countries may be relevant others will not – NZ is in a very unique position – distant from most other countries, whereas those in Europe etc are readily set to exchange resources. In my opinion any tech that is light on physical resources (minerals, etc) but strongly innovative, creative etc seems to be part of the way forward.

This blog probably isn’t the place for a heavy duty debate on the economy.
Anyway…
The first thing we have to do is to socialise the idea that gdp growth is a good thing. Paul refers to this at the start of his talk. There is a noisy minority in NZ who undermine this goal.
Then we need a multi-pronged approach.
The tertiary education system must be better aligned to the needs of the economy (shock, horror). At the moment it is a self-indulgent shambles.

We should support our successful firms, especially the large high value-adders, even if this is at the expense of small startups.
It is much easier for F&P Healthcare to grow by 10% (~$50M in sales) than to get that amount of turnover from new firms.

We should aim our research funding at increasing the value that can only be added in NZ (or a few similar places) rather than stuff that could be done anywhere in the world.
With the rise of Asia the world is a different place, and for the first time in 50 years we are going to have plenty of customers for peculiarly NZ products, especially food & fibre, and services. Supplying those new markets will be the problem.
I see no problem in the extraction of minerals and hydrocarbons as a growing part of the economy if we look after the environment. This can be done.

thanks for your comments. Skeptical about productivity? I will respond by quoting Krugman: “Productivity isn’t everything, but in the long run it is almost everything”. Yes, the French have a tourist industry. So does the Bay Area in California for that matter. But despite having the largest tourist industry in the world, tourism in France accounts for only 9% of its GDP. If you rank countries by the contribution of tourism to their economy, France comes in 86th out of 187.

And do smart scientists generate companies? In fact F&P Healthcare is probably New Zealand’s best example of this. I am also not sure it is useful to think of F&P as adding value – to a first, second and third approximation, raw materials contribute nothing to the value of their products. So I would argue that F&P Healthcare creates value rather than adds value. This value is created in New Zealand because the know how is here – and that’s modern economic geography in a nutshell.

Shaun
I’ve been out of the loop for a while…
1. I’m not sceptical about productivity.
2. Tourism’s share of GDP is 9% in both France and NZ. The point is that while you wouldn’t want to base a growth strategy on tourism, it isn’t a barrier to high productivity either.
3. F&P Healthcare employs smart scientists and engineers- no question. They were/are working in a well-capitalised corporate context. It is interesting that F&P managers identified that their traditional whiteware business was promising low growth so they adopted a diversification strategy which has proved to be very successful. The healthcare division was supported by sales of washing machines in its early years. There is a real message here- we need above all to make more corporates think like F&P.
DSIR people claimed to have some science input to the first healthcare products but I have learned to be a bit wary of that. ‘Success has a thousand fathers’, etc.
3. Back to the human capital. The 2008 stats showed about 8100 FTEs working in business sector R&D of whom ~5300 had a bachelor’s degree or higher. We would need to increase the 8000 to 40,000, all other things being equal. Paul admits we can’t produce these numbers domestically; his plan is to sell the benefits of living in NZ so well that floods of migrant R&D workers arrive in NZ. Can’t see it myself. Need a Plan B.

Re: F&P, I’ve never heard DSIR’s side of the story, but if I remember correctly, as F&P tell it (although I can’t find the source), the DSIR’s role was to connect Matt Spence with F&P after helping him with the initial prototyping of his respirator.

Yes, the human capital required is definitely a challenge, but again Finland did it. They went from 16000 research FTEs (mid 90s) to >40000 FTEs (mid 2000s) in ten years. Our patent analysis suggests that most of these are Finns rather than migrants. If New Zealand Inc were to make a commitment to do something similar to Finland, we could meet the human capital
needs of a high tech manufacturing sector.

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